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Why is our banking system so far behind?

Why is our banking system so far behind? | Cultural Trendz |

Say you owe money to a friend. How do you pay?

If you live in the United States, your fastest option is probably withdrawing cash from an ATM. Another possibility is writing a check.

But even after the check gets deposited, the cash won’t be available for hours, or days.

You can also wire the money electronically. Incredibly, that option often takes the longest of all.

These slow, inefficient choices seem normal to Americans, because we’re used to them. But when you examine what’s happening in other countries, it becomes clear just how antiquated the U.S. payments system has become.

In the United Kingdom, you log into your online banking account, hit send, and the money arrives in your friend’s account within 10 seconds. In Sweden, you pick up your mobile phone, and the transaction takes only about six seconds to process. Even less wealthy countries like Mexico and South Africa have moved to near-real-time payments.

In contrast, the U.S. still relies on infrastructure that dates back to the 1970s. If you pay your cable TV bill online on a Thursday, the payment may not be completed until the following Monday.

So why have we fallen so far behind? The root of the problem, according to experts, is a lack of leadership. No one is really in charge of our payments system.

"You would need somebody like the Federal Reserve, somebody who is a neutral third party, with impeccable credentials, to show leadership and to set goals," says Gene Neyer, global product manager at FundTech, a company that has helped other countries move to near-real-time systems.

The good news is that the U.S. Federal Reserve recognizes the problem. Last autumn the central bank laid out a vision of the future for payments. That vision looks a lot like where Sweden already is today.

"Today, U.S. consumers can’t make a near-real-time payment in a convenient and cost effective way from any bank account to any other bank account," the Fed’s 13-page paper noted. "In a world where several other countries are moving to ubiquitous near-real-time retail payment systems, the U.S. payment system does not have this capability."

But the Fed, which historically has been wary of imposing mandates on banks, is trying not to come off as heavy-handed. And that cautious approach may make it harder to bring about change in the banking industry.

In the U.K. and some of the other countries that now have fast payment systems, the government required banks to make the upgrades.

"The banks were being bullied into doing it here," says Dave Birch, a U.K. payments consultant.

Already, the Fed’s vision is sparking signs of resistance from the biggest U.S. banks. A trade group representing the nation’s largest banks, the Clearing House, recently filed comments arguing that any overhaul should pay for itself – not just in the long run, but also in the short-term.

That’s setting a high bar for change, because banks will have to make sizable upfront investments to upgrade their computer systems.

Eventually, those investments could reach the break-even point, says Craig Tillotson, managing director of Britain’s Faster Payments Scheme. He notes that electronic payments are cheaper to process than checks.

But Tillotson argues that fast payments have other, less tangible benefits for the banking sector.

"I think you have to see this as an investment an industry makes to meet the needs of its customers," he says. "You have to ask the question of whether you want to be in the modern world, whether you want to stay at the heart of how consumers and business manage their finances and the flow of their money."

The holy grail of person-to-person payments is the ability to send money instantaneously to anyone else’s mobile phone number. In Sweden, that’s been reality for over a year now, since the rollout of a system known as "Swish."

The upgrades have brought Swedish consumers a lot of benefits, according to Lars Gunnstam, who heads the consortium of banks that runs Swish.

You can split a dinner bill while you’re still sitting in the restaurant. Or make a last-minute payment to your utility company. A food truck owner, who would otherwise waste a lot of time handling cash, can instead get paid via mobile phone.

"He can immediately see that he has received the money," explains Gunnstam, an executive at the Swedish bank Nordea. "And you can immediately shake hands and say, ‘Fine, done.’ That is very important if you do business out in the street."

To be fair, there is innovation happening here in the U.S., too. Services like Popmoney and Chase QuickPay allow you to send money to a friend over your mobile phone.

But in terms of fast payments, those services don’t even come close to linking every U.S. bank and credit union. That makes them a lot less useful than a near-real-time system that’s available to every bank.

"You must build a sector solution that’s open for everybody," Gunnstam says. "If you can secure that, it will be a success."

In Sweden, as consumers use the Swish payment system, "the social media, the blog world, has been extremely positive. And that is very unusual for a bank, I can promise you,” Gunnstam chuckles.

For U.S. banks, that kind of glowing PR is likely to be a long way off. Under the timeline established by the Federal Reserve, the desired completion date for the overhaul is still a decade away.

Vilma Bonilla's insight:

Near real time payment system in the U.S. ~ "In U.S., it takes days for a bank payment to clear. In foreign countries, it happens in seconds."

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Full Frontal Banking

Full Frontal Banking | Cultural Trendz |

The future of consumer banking is all about intimacy. Forget the genial, ask-about-the-kids familiarity. This will be a level of closeness previously reserved for medical probes. It will be a vastly different kind of relationship, and we'll love it, once we get over feeling stark naked.

Banking is naturally an intimate activity. Financial institutions play a part in most major life events: college, marriage, buying a home, raising children, divorce, financing a business, retirement, illness or death. Customers are often full of emotion, feeling anxious or vulnerable as they approach their financial providers.

It's no wonder trust is so important to banking. In fact, research by BAV Consulting shows trust is actually more important to banks than other nonfinancial brands. The same research found that the key driver of consumer trust in the financial sector is not honesty or fairness, but helpfulness. Customers want a bank that is trying to look out for their interests.  

Over the next decade, banking is going to get even more intimate, and helpfulness even more vital to success. This deeper level of intimacy will come from three factors, all born out of technological advancements.

First is location. In ten years, nearly all banking will be done in your home or with a mobile device, in the places comfortable to you, not on display in the picture windows of a sterile retail branch. Banking will occupy your spaces and develop an everyday closeness as it fits seamlessly into your life.

The second factor is data. Soon, your bank will know you better than you know yourself. Vast amounts of information about our spending habits and financial behavior are already being collected. Combined with demographic details, thoughtful analysis will tell a great deal about an individual's patterns, risk tolerances, even upcoming financial goals – then offer the services he or she actually needs or wants. It will feel like a multi-faceted version of Amazon's "you might also like" function.   

And unlike the rigid and blunt FICO score, big data can create a precision instrument for banks that is a far better predictor of credit risk. (Yes, there are discrimination concerns around fair lending, but in my future world, this has been addressed carefully by regulators.)

The last factor is personalized service. As technology makes retail banking cheaper, and big data makes it more insightful, banks will be able to provide mass customization of services. With just the tweak of an algorithm, an offering gets tailored to a customer's specific patterns and profile. I won't have to troll other bank websites to find a credit card with the right constellation of features and terms, because my bank will know how to create a custom card that suits my exact needs.

Future banking will feel more like a medical relationship – integrated into everyday life, understanding and serving you with the intimacy and attention of the family doctor.

This full frontal banking will be better for everyone – consumers get a more useful experience, improving their financial health and opportunities. Banks get a better tool to gauge credit risk, plus the ability to spot troubling patterns and try to help consumers before delinquencies even arise. Banks will also launch more effective, targeted sales pitches with better success rates. Ultimately, they will have deeper and more stable consumer relationships, which are also more profitable.

But this powerful type of relationship only works with a Hippocratic-oath level of trust. (Imagine a bank using this new personal data to find the most effective ways to bilk you?)

Since trust is driven by helpfulness, new technology is really only a conduit – the special sauce here is intent. Are you trying to improve my long-term financial life?

Any bank can talk a big game about customer-centricity, but the business models have to back it up. So far, the new players – e.g., Simple, Moven, GoBank – seem best at embracing this kind of helpful relationship in all aspects of their organizations. (Moven even has its own oath.)

Future consumers will get over the creepy sensation of being this exposed and revel in the ease of banking and their newfound financial health. Future bankers will accept that success in the land of intimacy requires a genuine, long-term commitment to the well-being of every consumer.

The only question is whether today's established players will be the bankers of the future.

Susan Ochs is a former Treasury Department advisor and a senior fellow at the Aspen Institute, where she founded The Better Banking Project.

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Banking Regulation & Proprietary Trading | Rule that curbs bank risk-taking nears approval

Updated, 6:20 a.m. |

Wall Street is entering an uncertain new era as the rule that has come to symbolize Washington’s efforts to rein in financial risk-taking finally takes hold.

Five years after the financial crisis, federal regulators are poised to approve the so-called Volcker Rule, the keystone of the most sweeping overhaul of financial regulation since the Depression. The rule, a copy of which was reviewed by The New York Times, imposes some requirements that are tougher than the banks had hoped.

 Five federal agencies are expected to vote to approve the rule on Tuesday, though some might do so in private because of inclement weather in the Washington area, representing a potential shift in the balance of power in financial reform as regulators gain more leverage over the largest banks. Although it counts as only one of 400 rules under the Dodd-Frank financial overhaul law — and nearly two-thirds of the regulations remain unfinished — the Volcker Rule became a litmus test for the overall strength of the law.

But the rule, which aims to draw a line between everyday banking and Wall Street wheeling-dealing, is no panacea. Some critics say the rule, which regulators agreed to delay until July 2015, does not go far enough.

For its part, Wall Street is expected to scour the rule for loopholes and consider whether to challenge it in court.

At its core, the rule bans banks from trading for their own gain. The practice, known as proprietary trading, is one of Wall Street’s most lucrative — and riskiest — activities.

Supporters of the Volcker Rule, the brainchild of Paul A. Volcker, a former Federal Reserve chairman and adviser to President Obama, said it would help prevent the buildup of the kinds of risky positions that nearly sank Wall Street in 2008. And they argued that, to help prevent future bailouts of Wall Street, large banks that enjoy forms of taxpayer backing should not use customers’ money to make bets on the direction of stocks and bonds.

In recent weeks, regulators who favored a more stringent version of the rule pressed for changes that they think will make it harder for banks to evade the regulation. The version of the rule reviewed by The Times shows that, in some areas, the hard-liners got their way.

The rule, for example, includes new wording aimed at the sort of risk-taking responsible for a $6 billion trading loss at JPMorgan Chase last year. The bank contended it was trading to hedge its broader risks, but in fact it built a sprawling speculative position that spun out of control.

To prevent such blowups, according to the version of the rule reviewed by The Times, it will require banks to identify the exact risk that is being hedged. The risks, the rule said, must be “specific, identifiable” rather than theoretical and broad.

The Volcker Rule also takes a swipe at the bonus culture of Wall Street, requiring banks to shape compensation so that it does not reward “prohibited proprietary trading.” In addition, it requires chief executives to attest that they have established programs for complying with the rule.

“The C.E.O. of the banking entity must, annually, attest” to regulators that the bank “has in place processes to establish, maintain, enforce, review, test and modify the compliance program,” according to the copy reviewed by The Times, which is dated Friday.

In an October 2011 draft of the rule, regulators did not include such a mandate, in contrast with the tougher tone of this version.

But it could have been even tougher. Some critics of Wall Street wanted the executives to attest that their bank was actually in compliance with the rule, not just taking steps to comply.

The banking industry is also expected to keep up its fight against the rule. Wall Street lobbyists opposed the Volcker Rule more fiercely than any other regulation that has come from the Dodd-Frank law, which Congress passed in 2010. They argued that trading was not a primary cause of the financial crisis and that the Volcker Rule could actually prevent banks from carrying out safe activities, like hedging against risks.

Now that the final version of the rule has emerged, lawyers and lobbyists are likely to seize on the fuzzy nature of proprietary trading, which can resemble more legitimate forms of trading essential to doing business on Wall Street.

The rule, for example, allows banks to buy and sell securities if they show that the purchases are to meet the demands of their customers, a practice known as market-making. But banks, under the guise of market-making, could build a proprietary position in shares of Google, for example, contending that at some point clients might buy the shares.

The question is whether the wording of the Volcker Rule is strict enough to force banks to stockpile securities only for customers. The version reviewed by The Times shows that while regulators adopted some measures to prevent banks from masking their proprietary bets as market-making, the rule may still be vulnerable to evasion.

Indeed, the rule says that banks can build up positions to meet “the reasonably expected near-term demands of clients, customers or counterparties.” Banks and regulators may clash over what is “reasonably expected,” and the rule leaves it largely up to banks to monitor their own trading.

The rule also allows banks to do proprietary trades in bonds issued by governments. United States banks can make bets with Treasuries and even municipal bonds. In a significant concession, the Volcker Rule allows the foreign affiliates of United States banks to trade in bonds issued by foreign governments.

Under the rule, banks can also place trades that are meant to offset the risks posed by positions they hold, an activity known as hedging that can resemble proprietary trading.

The five federal agencies writing the rule — the Federal Reserve, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation and the Comptroller of the Currency — were divided over how tough to make the hedging language.

While some officials at the Fed and the S.E.C. have wanted to allow banks significant flexibility to carry out trading that is considered important for their health and the functioning of markets, Gary Gensler, the head of the Commodity Futures Trading Commission, sought to eliminate loopholes.

So when the Fed sent out a draft last month that removed a sentence that required hedging to be “reasonably correlated” with a bank’s risks, people briefed on the matter said, Mr. Gensler and another agency commissioner, Bart Chilton, pushed back. And in recent days, they persuaded the Fed to insert into the rule a provision that requires banks to conduct a “correlation analysis” as well as “independent testing” to ensure that the trades used for hedging “may reasonably be expected to demonstrably reduce” the risks.

To further prevent banks from masking proprietary trading as a hedge, the rule required banks to conduct an “ongoing recalibration of the hedging activity by the banking entity to ensure” that the trading is “not prohibited proprietary trading.”

The votes on Tuesday, which come more than a year after Congress required the agencies to complete the Volcker Rule, offer Wall Street a degree of clarity that once seemed remote. Until recent days, regulators appeared unlikely to meet the recommendation of Treasury Secretary Jacob J. Lew, who urged the agencies to complete the rule in 2013.

The weather in Washington — snow and sleet are expected — may delay the rule slightly. The C.F.T.C. canceled its public vote “due to the closure of all federal government agencies because of inclement weather,” though it plans to have commissioners vote individually in private. The F.D.I.C. still plans to vote in public.

“For the banks, this is one of the most significant regulatory changes in decades,” said Alan W. Avery, a partner at Latham & Watkins who represents financial institutions in regulatory issues. “It cuts off or fundamentally alters traditional sources of revenue for the banks.”

Vilma Bonilla's insight:

"Five years after the financial crisis, federal regulators are poised to approve the so-called Volcker Rule, the keystone of the most sweeping overhaul of financial regulation since the Depression. The rule, a copy of which was reviewed by The New York Times, imposes some requirements that are tougher than the banks had hoped."

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